In its most simple description, bankruptcy is a federal legal proceeding that relieves debtors from certain debts and prohibits creditors from undertaking any collection efforts for those debts. The United States Constitution provides Congress with the legislative power to establish bankruptcy laws. (See U.S. Const. art. 1, § 8, cl. 4). The laws that currently govern bankruptcy proceedings can be found in Title 11 of the U.S. Code, which is colloquially referred to as the “Bankruptcy Code.”
Types of Bankruptcies
The Bankruptcy Code provides for six different types of bankruptcies, which are referred to as “chapters” based on the chapter in the Bankruptcy Code that describes them. Aside from one — chapter 9, which is available only to cities, towns, and other municipalities — each chapter is briefly explained below:
Chapter 7
Chapter 7, the most common form of bankruptcy, is a liquidation proceeding where the assets of a debtor that cannot be exempt from creditors (if any) are sold by a trustee and the proceeds distributed to creditors. Chapter 7 is available to individuals, married couples, and businesses. The eligibility for chapter 7 is determined through a statutory formula known as the “means test,” which basically compares your current monthly income with the state’s median income for your family size.
Chapter 11
Chapter 11 is a type of proceeding that allows for the reorganization of debts under the oversight of the bankruptcy court and, if applicable, a committee of creditors. The vast majority of chapter 11 cases are filed by businesses, but individuals and married couples can also file chapter 11 if they do not meet certain requirements under chapter 13. Chapter 11 allows businesses to propose a reorganization plan that, among other things, can (i) repay debts out of future profits; (ii) sell some or all of the business’s assets; or (iii) provide for a merger or recapitalization.
Chapter 12
Chapter 12 is a specialized chapter for a family farmer or fisherman who wishes to reorganize the business and continue operating. It is often similar in structure to a chapter 13 reorganization.
Chapter 13
Chapter 13 is a repayment plan that lasts 3-5 years where an individual or married couple can reorganize their debt and generally keep the assets that may be at risk for liquidation under chapter 7. There are certain requirements to filing chapter 13, namely that you have regular income and that your overall debts total less than certain thresholds. The monthly payment in a chapter 13 plan is primarily based on your ability to pay and the assets you want to keep.
Chapter 15
Chapter 15 is largely a supplement to bankruptcy proceedings in foreign countries to promote and support cross-border insolvency issues between debtors, creditors, and other parties in interest here in the United States and abroad.
Benefits of Bankruptcy
Filing bankruptcy has historically carried a heavy stigma in our society. On the one hand, the public’s perception of bankruptcy has stemmed from the mistaken notion that those who file bankruptcy never intended to repay their financial obligations or chose to ignore them. On the other hand, the stigma can be more personal in nature, stemming from the bothersome idea that others will think negatively of you and the feelings of failure or shame.
But most bankruptcy debtors are honest and hard-working, who have experienced financial hardships and severe distress, such as divorce, a death of a family member, illness, disability, business failure, or job loss. Regardless of the extent of any truth or credibility to this stigma, bankruptcy is a legitimate and lawful process to obtain a fresh start. Two of the biggest benefits of bankruptcy are described below.
Automatic Stay
A bankruptcy filing enacts what is known as the “automatic stay.” The automatic stay is a temporary “injunction” during the pendency of the bankruptcy that prohibits or stops all collection activity, garnishments, evictions, foreclosures, repossessions, judgments, and any other actions or attempts to pursue money owed against the debtor(s) who filed bankruptcy. As the name implies, the automatic stay takes effect immediately and cannot be violated. There are some exceptions (such as criminal proceedings and most family law matters), and creditors can ask for the stay to be lifted under certain circumstances, which will ultimately be decided by a bankruptcy judge. If a creditor violates this injunction, the debtor can sue the creditor, void the act or occurrence that violated the stay, and seek actual and punitive damages, including attorney fees and costs.
Discharge
The ultimate goal of bankruptcy is to obtain a discharge. A bankruptcy discharge “wipes out” a debtor’s personal liability for most debt, meaning that the debt is no longer legally enforceable against the debtor. In other words, the discharge order entered by the bankruptcy court acts as a permanent “injunction” prohibiting creditors from taking any form of collection action against the debtor. However, there are some nuances and exceptions to the discharge that should be discussed with your bankruptcy attorney. For example, taxes, student loans, and domestic support obligations (i.e., alimony and child support) may not be dischargeable.
If you are overwhelmed, facing financial hardship, and may be considering bankruptcy, give our office a call. We can go over your personal situation, answer your questions, and review your options moving forward.